Chapter 14 - Work flexibility in older age - a new

CHAPTER 14
Work flexibility
in older age a new approach
to retirement
Introduction
14.1With people living longer and fitter lives, the
costs of pensions increasing, and younger
workers seeking to increase their current
living standards, growing numbers of people
want to work, or feel a need to work, beyond
the State pension age. As our concept
of retirement shifts to become less agerelated and more active, our systems and
structures may also need to adapt. In addition,
sustainability considerations may mean that
the idea of increasing retirement age should
play a central role in our pensions strategy.
210
14.2This chapter examines issues for Government,
individuals and employers, in relation to
retirement age and work flexibility.
Policy Context
14.3Government policy is to facilitate those who
wish to extend their working lives. The
European Union’s Lisbon Strategy, endorsed
by the Government, has an overall goal
of making the EU the most dynamic and
competitive knowledge-based economy in the
world, with more and better jobs and greater
social inclusion. Part of the Lisbon Strategy is
focused on increasing workforce participation
by older workers, and the National Reform
Programme has specific initiatives in relation
to labour supply and active ageing.
14.4The average exit age from the labour force in
Ireland was 64.1 years in 2005, compared to
the EU25 rate of 60.9 years. Older workers’
participation has contributed significantly to
increases in the labour force, with employment
rates in the 55 to 64 years old category rising
by over 10% in the past ten years due to
greater labour demand. This rise is driven
less by a delay in retirement than by an
increase in the movement of the formerly nonemployed into jobs. The increase was mainly
due to women entering jobs from home duties
but men entering from unemployment also
played a significant role. Nevertheless, the
overall effect is that older people now have the
opportunity to work longer and are choosing to
do so.
Green Paper on Pensions
14.5The current employment rate for older
workers (aged 55-64) in Ireland is over 53%
(CSO-QNHS, Q1 2007). The EU25 employment
rate for older workers is 42.5% (2005), with
the EU target for 2010 at 50%. Nevertheless,
there may be scope for further increases in the
employment rate for this age group in Ireland
as the overall employment rate is at 68.6% and
the population in the 55-64 age bracket will
increase significantly in years to come.
14.6Lower employment rates in the 55-64 category
may reflect the fact that many older workers
move out of the labour force directly from
full-time employment. Among males, much of
this movement out of the labour force is due to
illness. Older women’s lack of participation is
almost entirely due to family-related reasons.
14.7In a recent review undertaken by the IMF (IMF
(2005) “Who Saves in Ireland”), it was noted
that Ireland already has strong incentives to
keep older people in the workforce, that the
effective retirement age is one of the highest
among advanced economies and that pension
age in the public service has recently been
increased (see Chapter 13). The compulsory
retirement age for most new entrants to the
public service has also been removed since
2004. Non-contributory pensioners can earn
additional income through employment while
retaining their State pension entitlements,
following the introduction of a specific weekly
earnings disregard in 2006. To address the
increasing number of older workers exiting the
labour market early through disability benefits,
an Employment Retention Grant Scheme
and a new wage subsidy scheme have been
introduced. In addition, direct and indirect
discrimination at work is prohibited by equality
legislation.
14.8Notwithstanding that, the OECD151 has
commented that population ageing in Ireland
could have a profound socio-economic
impact if Ireland’s potential labour supply is
not mobilised more effectively. As pressure
builds on the cost of Social Welfare pension
provision, the need for greater private pension
saving will grow if income adequacy in
retirement is to be maintained for all. Policies
151OECD (2006) ‘Ageing and Employment Policies:
Ireland’
that delay retirement, particularly when
flanked by other policies to provide alternative
sources of income in retirement, allow fiscal
goals to be achieved with less pressure to
reduce retirement incomes, underlining the
desirability of measures that encourage people
to work longer.
Environmental Changes
14.9Life expectancy for men and women in Ireland
is increasing and this is a very welcome
development. However, as this Green Paper
has made clear, increasing life expectancy/
longevity brings with it very specific challenges
for pensions policy. The longer a person lives,
the longer that person will draw a pension,
and the higher it costs to provide this pension.
The implication of the shift in the ratio
between the length of working lives and overall
life expectancy is that the cost of funding
retirement rises significantly for all concerned.
The individual’s perspective
14.10There are, naturally, a range of viewpoints on
retirement age held by individuals. Among the
most important are:
l The
less well-off have lower life
expectancies than the better off, and
men have lower life expectancies than
women. Any increase in retirement age will
therefore have a disproportionate impact on
the less well-off and on men;
l The
State Pension (Contributory) is
understood by many to be an entitlement
based on many years of PRSI contributions.
Any increase in the retirement age
therefore might be taken as a breach of this
entitlement;
l On
the other hand, there are many people
who wish to continue working beyond
retirement age, and see it as unfair that
they can be forced to leave employment
without compensation simply because they
reach a specific age;
l There
are some occupations, especially
manual occupations, where the ability to
l For
those who have not accumulated
sufficient retirement savings by retirement
age, further employment may be the only
practical means of achieving an acceptable
standard of living in retirement; and
l There
are a considerable number of
obstacles, structural and financial placed in
the way of those who wish to work beyond
current retirement ages.
The employers’ perspective
14.11Employers may have a number of concerns
about any increase in the retirement age or
removal of compulsory retirement:
211
l In
some manual occupations, the ability to
operate effectively falls rapidly with age. In
the absence of compulsory retirement, or if
retirement age was increased significantly,
it would be necessary to lay off those
employees no longer able to meet the
demands of their work. This would be very
difficult for both employees and employers;
l The
cost of providing health and life
insurance benefits, and general insurance
for employees increases considerably with
age. Raising or removing retirement ages
could result in higher costs for employers;
and
l Many
employees look forward to their
retirement, and oppose anything that would
interfere with their right or ability to retire
at the retirement age they have expected;
operate effectively reduces with age. Any
increase in retirement age would leave
people in those occupations vulnerable;
l In
many organisations, retirements provide
promotion opportunities for younger
employees, which are an important
incentive and reduce employee turnover.
Higher retirement ages or no compulsory
retirement would necessitate a rethink
of the promotion structure of such
organisations.
14.12It should also be noted, however, that
many employers value the experience and
loyalty displayed by older members of their
workforce and seek to retain such members
of staff beyond normal retirement age, where
possible. This is particularly true in the
relationship with clients and customers.
14.13 T
he next section examines whether barriers
exists within the work environment, both from
a regulatory and attitudinal point of view, that
prevent older people remaining in the workforce.
Green Paper on Pensions
Barriers to older persons
working longer
Employment and Equality law
14.14There is nothing in employment or equality law
that imposes a compulsory retirement age.
Indeed, some recent measures have improved
the possibilities for people to work into older
age if they wish.
212
14.15An upper age limit of 66 years for bringing
claims under the Unfair Dismissals Acts, 1977
to 2005, was removed by the Equality Act, 2004.
There is still an upper age limit of 66 years
in respect of claims for statutory redundancy
payments, but its removal is proposed in the
Protection of Employment (Exceptional Collective
Redundancies) Bill, 2007.
14.16In January 2006, the Labour Relations
Commission prepared a Code of Practice on
access to part-time working, the Industrial
Relations Act 1990 Code of Practice on Access
to Part-Time Working (Declaration) Order 2006
(S.I. No. 8 of 2006). The preamble to the Code
of Practice indicates that widening access
to part-time work can have a role to play in
increasing the participation of older people in
the workforce.
14.17The Employment Equality Acts 1998 and 2004
protect against discrimination on the grounds
of age, and against discrimination on other
grounds, in relation to access to employment.
14.18However, in many employments, in both
the private and public sectors, a “normal
retirement age”, at or below 65 years of age,
is in place. The purpose of such provisions is
to give flexibility to employers and employees,
having due regard to the nature of the work
being performed. Such retirement age limits
are not contrary to legislation such as the
Unfair Dismissal Acts or the Employment
Equality Acts. For example, Section 34(4) of the
Employment Equality Act, 1998, reads as follows:
“Without prejudice to subsection (3), it shall not
constitute discrimination on the age ground to
fix different ages for the retirement (whether
voluntarily or compulsorily) of employees or any
class or description of employees.”
Green Paper on Pensions
14.19Upper age limits on employment have
recently been relaxed somewhat in the public
service. The Public Service Superannuation
(Miscellaneous Provisions) Act 2004, which
covers new entrants to the public service on
or after 1 April 2004, removed the compulsory
retirement age for new entrants to the public
service (see Chapter 13), with the exception
of certain posts in the Permanent Defence
Forces, the Garda Siochána, the Prison Service
and the Fire Service. The Act, however,
did not affect the terms of public service
employees recruited before 1 April 2004, and
retirement at 65 remains obligatory for most of
these. Section 8 of the Civil Service Regulation
(Amendment) Act 2005, provided, with effect
from 6 October, 2005, for the recruitment of
persons over 65 years to the Civil Service on
the condition that the person can be defined as
a “new entrant” to the Civil Service.
Cultural Barriers in organisations and society
14.20While the average exit age from the labour
force in Ireland is one of the highest in the
European Union, there is nevertheless a
culture of retiring before the age of 65. It may
be that a mandatory retirement age in many
employments has reinforced the tendency. On
the other hand, a strong cultural disposition
towards retirement before 65 is likely to have
been ameliorated by the fall in unemployment
levels and an increasing reliance on foreign
workers in many sectors of the economy. In
any event, the average exit age from the labour
force now exceeds 64 years, as indicated at
paragraph 14.4 above.
14.21There is a view that a change of mindset needs
to be promoted among both employers and
employees to encourage older workers to
remain in employment. The social partners
would have a significant role to play in bringing
this about.
14.22As outlined above, employers’ attitudes
towards older workers are not always positive.
Surveys152 have indicated that many employers
consider that older people have inappropriate
152Survey undertaken by Public and Corporate
Economic Consultants (PACEC, 2001) as cited
in OECD (2006) ‘Ageing and Employment Policies:
Ireland’ ; NESF (2003) ‘ESRI Survey of Employer
Perceptions on Older Workers’
skills, are less productive, less flexible, less
ambitious and take more sick leave than
younger people. However, against that, many
employers view older workers as being loyal,
reliable and rich in experience.
14.23Labour force development measures are,
as outlined below, addressing the issue. In
addition, cultural barriers could probably
be usefully counter-balanced by setting
retirement age limits and pension structures
so as to facilitate a choice by older people to
remain longer in employment.
Structural barriers
14.24Early retirement arrangements arise from
time to time due to specific circumstances
in particular employments or firms. These
arrangements are not necessarily a barrier
to people working longer. Indeed, with
appropriate retirement age limits and
pension structures in place, early retirement
arrangements could facilitate a move to a
more desirable or appropriate job for an
individual in mid or late career.
14.25Specific working periods are a feature of
many pension arrangements. It appears that
entitlement to a “full” pension after a set
period, usually forty years in Ireland, needs to
remain a feature of pension schemes if they
are to continue to appeal to the consumer.
Options to defer pension and have it paid
later at a higher rate appear a useful way
of facilitating individuals to choose to stay
longer in work. Arrangements for pension
contributions could also offer a range of
options during the deferral period.
14.26Many individuals spend extended periods out
of paid employment or working on a part-time
basis. These people may have inadequate
pension contributions on retirement, or may
be less likely to join a pension scheme than
those working full time for a whole career.
Flexibilities in the pension system, such as
voluntary contribution options and deferral of
pension payments, are likely to be helpful in
this situation.
14.27Flexibility in working hours, particularly
through the availability of part-time work,
can have a part to play in increasing the
participation of older people in the workplace.
Options such as a gradual move to retirement
may also have a positive role to play.
Employers are being encouraged to adopt
more flexible working arrangements which
would facilitate older workers to remain in or
return to the workforce.
Restrictions in the State Pensions System and work
related issues
14.28 I n relation to retirement, and as outlined in
Chapter 6, the existing Social Welfare pensions
structure may be considered restrictive in a
number of ways:
l There
is a requirement for people to retire
and give up employment in order to claim
pension at the normal retirement age of 65
years of age;
l There
is no facility available for people who
have reached 65/66 years of age with a less
than complete insurance record to improve
on their record through further employment
and qualify for a better pension; and
l there
is no provision within the system to
allow for someone who must/wants to retire
earlier than the normal retirement age.
14.29 M
ore flexibility may thus be needed in the
Social Welfare pension system in order to align
its criteria with a changed environment.
Overcoming Barriers to Working
Longer
Policy Developments
14.30Over the years, many barriers to workforce
participation, particularly female participation,
have been removed. Policies to facilitate
female participation, as well as to combat
both youth unemployment and long-term
unemployment, have been successfully
developed and implemented.
14.31More recently, the social partnership
agreement, Towards 2016, indicates (Section
32.2.6) that, in the context of changing
demographic patterns, a key objective for
the Government and social partners is to
maximise the opportunities for older people
to participate in education, employment and
other aspects of economic and social life:
Green Paper on Pensions
213
214
“The continued participation of older people
in the labour market will be encouraged
and facilitated to meet the challenge of an
ageing society. A cultural mindset change
will be promoted among both employers and
employees to encourage older workers to
remain in employment. Promotion of training
and upskilling of employees, particularly for
low-skilled/older workers, will take place to
enhance employability in the context of the
impact of globalisation. The preventive process
will be extended to those aged 55-64 to facilitate
unemployed older workers remaining attached
to the labour market. Training and advisory
services, including those provided by FÁS, will
assist older people who wish to return to the
workplace.”
Guidelines for improving working conditions
for older workers were originally suggested by
the OECD (2006) in “Ageing and Employment
Policies - Ireland”. The OECD suggested that
the Government and social partners should
issue guidelines and proposals for developing
innovative work arrangements and job design
and improving the work environment for older
workers. Germany’s new ‘Quality of Work’153
initiative which promotes improved working
conditions in light of demographic changes
was cited as a good example. Another
example is ‘Managing Age: A Guide to Good
Employment Practice’, published in February
2007 for the CIPD UK and Trades Union
Congress (TUC) by Middlesex University and
Centre for Research. The Guide focuses on
the older workforce and outlines:
Labour Force Development measures
14.32 I t is important that a distinction is made
between efforts to encourage people to work
up to the age of 65 and initiatives to allow
people to continue working beyond retirement
age. Labour market measures are primarily
aimed at the pre-retirement age group. The
primary objective of labour market measures
in this area is to try to encourage people to
remain in employment up to the age of 65.
14.33The Preventive Process, whereby those on
the Live Register for more than 3 months are
referred to FÁS to assist progress towards
employment, training or active labour market
programmes, was extended in July 2006 to the
55-64 year old category. This complements
the phasing out of the Pre-Retirement
Allowance (PRETA), where older workers could
receive financial support but were not required
to be available for work.
14.36One of the more effective ways to raise longterm economic performance is to boost the
skills of workers. The promotion of training
amongst older workers has been undertaken
to a lesser degree than amongst younger
workers. Research shows that effective skill
development is best started at an early age. It
is therefore important to ensure that education
and training opportunities are available over
a worker’s career, so as to reduce the need
for later interventions which are less effective.
At the same time, however, the availability of
training to older workers is now also being
stepped up.
14.34The Disability Scheme, a new wage subsidy
scheme introduced in 2005, encourages
employers in the private sector, through
financial support, to employ people with a
disability. Older workers who are claiming
Disability Benefit can avail of this scheme.
The increase with age in claims of disability
benefits and invalidity pensions could be
examined to determine the issues underlining
early withdrawal from the labour market.
14.35Guidelines could also be developed to
improve working conditions for older workers.
Green Paper on Pensions
l HR
approaches that are consistent with
employment law regulations;
l means
of developing good practice to meet
new legal requirements;
l the
business case for employing people of
all ages;
l guidance
on good people management; and
l principles
to support and sustain business
success.
14.37A substantial increase in funding has been
provided to the FÁS Competency Development
Programme and its Workplace Basic Education
Fund, as well as to the Skillnets Training
Networks Programme, to enhance in-company
training and basic skills development
153http://www.inga.de/Inga/Zentralredaktion/PDF/
English/old-and-young-pdf,property=pdf,bereich=in
ga,sprach=de;rwb=true.pdf
programmes. This approach will assist in
the adaptability of workers, and particularly
older workers, operating in a rapidly-changing
globalised economy, enabling them to transfer
to new jobs more easily or to move up the
value chain in terms of quality of job.
14.38Consideration also needs to be given to how
people could be encouraged to continue to
earn at older ages or after they take formal
retirement. For example, this may be parttime work in their own area of experience
(increasingly common among self-employed
professional people) or it may result from
retraining or commencement of a new career,
perhaps working shorter hours and/or at lower
rates of pay.
14.39Attention might also be given to the alignment
of policies to support any change in retirement
age, including policies to:
l Continue
to create the conditions for
economic growth and competitiveness
so that there are sufficient employment
opportunities for all, to support our
economic capacity and to ensure that
everyone has the opportunity to work and
save for their retirement;
l Narrow
health inequalities, through
initiatives such as the National Action
Plan for Social Inclusion, so that all socioeconomic groups enjoy life expectancy
increases and better health;
l Adapt
HR processes and practices, e.g.
recruitment, performance management and
career progression, and where necessary
employment law, and provide guidance to
employers and employees in this regard;
l Intervene
early to retrain workers
– identified by the National Economic and
Social Forum Report in 2003 as the most
cost-effective method to prolong labour
market participation. This will also assist in
increasing the quality of the workforce;
l Improve
overall skills and training among
workers at all stages of their careers,
enabling all workers to maximise their
career options; and
l Support
cultural changes necessary
through:
l Effective
supports, including reviewing
perceived barriers to the employment of
older people such as insurance costs,
considering financial incentives for
employers to hire post-retirement age
workers (e.g. reduced social insurance
contributions for older workers) and
occupational health initiatives;
l Communication
of the employment
rights and responsibilities, the
attractions and demands of staying at
work and communicating the business
case for employers of employing
older workers in terms of minimising
cost pressures, flexibility, broadening
the available labour pool, reducing
absenteeism and turnover, etc., and
understanding of diverse customer base.
215
Pensions and the EU
14.40Before discussing possible options for
change in relation to the retirement age, it
is important to consider the debate which is
ongoing within the EU in relation to pensions.
Several European Councils have highlighted
the challenge of an ageing population and its
implications for the maintenance of adequate
and sustainable pensions.
14.41The Laeken Council in December 2001
launched what is known as the open method
of coordination on pensions. This approach
to policy making and information sharing is
based on eleven common objectives under
three headings: (i) safeguarding the capacity
of pensions systems to meet their social
objectives; (ii) maintaining their financial
sustainability; and (iii) meeting changing
societal needs.
14.42The concerns at EU level are to ensure that
pension systems provide retired people with a
securely financed adequate income that does
not destabilise public finances or impose an
excessive burden on future generations. At the
same time, pensions systems should maintain
fairness and solidarity and respond to the
changing needs of individuals and society.
14.43Since the 1950s, life expectancy has increased
by 8-10 years in European countries while,
over the same period, male labour force
Green Paper on Pensions
participation at the age of 60-64 has dropped
from close to 80% to around 30%. In countries
such as Austria, Belgium, France and the
Netherlands, participation rates for older
men have dropped to 20% or lower. During
this time, the statutory age of entitlement
to public old-age pensions has not changed
significantly. In most Member States, a rapid
fall in the employment rate occurs at around
55 years of age. The Lisbon Council set a
target to increase the average EU employment
rate among older women and men (55-64)
to 50% by 2010 and Ireland has achieved this
target.
216
14.44There has been some discussion with regard
to a general rise in retirement ages and
some countries have taken action in this
regard. However, for many countries, the
focus is on measures which will raise the
effective retirement age and initiatives being
implemented include:
l tightening
the conditions for early
retirement;
l increasing
the contribution levels required
for full pensions;
l introducing
a strong actuarial link between
contributions and benefits;
l providing
for flexibility in the retirement age;
l creating
incentives for workers who want to
remain in the labour market after age 65;
l facilitating
a gradual move into retirement
through changed working arrangements.
Retirement Age Options
Deferring the Social Welfare Pension
14.45The State has direct control over the age at
which State benefits are paid. Any change has
an indirect effect on supplementary benefits.
14.46Some countries operate a system whereby
there is flexibility in the age at which State
pensions will be paid. However, in drawing
down a pension earlier than the statutory
age, a person may incur an ongoing penalty
in terms of the rate of payment they receive.
This might involve a 5 to 10% reduction for
each additional year pension is received. For
example, a person taking pension at age 60
Green Paper on Pensions
would see his/her rate of payment reduced on
a permanent basis by between 25% and 50%.
In this way, the link between contributions and
benefits is strengthened.
14.47If such a measure was being considered in
Ireland, we would need to take account of
the relationship between such a pension and
other Social Welfare payments. For instance,
a reduction of 25% in a person’s State Pension
(Contributory) would bring recipients below the
current Supplementary Welfare Allowance rate
of €185.80 per week which would, subject to
other means, make them eligible for a topup and other supplementary payments. The
reduced rate of payment could also be below
other scheme payments such as Invalidity
Pension which, it appears, already supports a
degree of early retirement.
14.48In any event, the early retirement rate in
Ireland is not as high as in other countries and
work force participation rates for older people
have reached the target set by the European
Council. It is important that this trend is
maintained and this suggests that there
should be no downward move in the normal
retirement age for Social Welfare purposes.
14.49While workforce participation for older
workers is above the EU average, research
suggests, nevertheless, that early retirement
is common in this country. On examination
of a sample of people who had already
retired, it was found that two thirds had left
employment before age 65. The most common
reason, which accounted for one-third of
early retirements, was illness or disability.
Access to a voluntary redundancy package
or pensions, which made early retirement
affordable, accounted for the second highest
proportion of early retirements, i.e. 27%. The
research also found a preference for early
retirement amongst those still at work, with
37% indicating that they would like to retire as
soon as possible154.
154Older People’s Preferences for Employment
and Retirement in Ireland (Fahey and Russell)
- Paper presented to conference on Employment
and Retirement among the over 55s; Patterns,
Preferences and Issues, NCAOP Sept 2001.
14.50 G
iven the absence of any formal support for
early retirement in the Social Welfare system,
it appears early retirement is already well
supported through occupational schemes. In
the circumstances, again, there does not seem
to be any need for the Social Welfare system
to further supplement this process by paying
pensions before age 65.
14.51In the Public Service, the trend is to raise
retirement ages. Recommendations of the
Commission on Public Service Pensions
sought to raise the retirement age for public
servants to 65, although this was not a
unanimous view. However, the Public Service
Superannuation (Miscellaneous Provisions)
Act 2004 increased minimum retirement ages
for most new entrants to the public service
to 65 years of age. That said, there will be
people for whom retirement before age 65 is a
necessity due to, for example, redundancy late
in life or ill health.
14.52Allowing people to postpone retirement and to
improve their Social Welfare benefits through
further employment would be more in keeping
with EU policy in this area. An example of a
model, already in use in Finland, involves a
worker being able to claim pension anytime
after 60 years of age. However, the pension
is permanently reduced by 0.5% per month
between age 65 and the age that the pension
is claimed. A person claiming pension at 60
years of age, for example, suffers a permanent
reduction of 30% in the pension paid. Similarly
a person who postpones retirement until after
65 years of age receives a higher payment
with an additional 1% paid for each month
by which retirement is postponed. Similar
arrangements now exist in the UK with an
option to take a lump sum instead of an
enhanced pension. The objective of these
systems is to link the overall cost of pension,
the length of time over which the pension is
claimed and estimated life expectancy.
14.53If such a model could be combined with
allowing those with reduced entitlements to
count contributions made after age 65/66
so that they could improve their position, it
would deal with most of the criticism relating
to the inflexibility of the existing Social
Welfare pensions system and contribute to
the incentives available for people to remain
in employment after normal retirement. It
would be important that the overall cost of
pensions did not increase. However, it is
difficult to see how an increase in costs could
be avoided for those with reduced entitlement
working to improve their position.
14.54For those with full entitlement deferring
payment, the scheme would need to be
actuarially based to take account of Irish
conditions including life expectancy of
Irish people and the overall cost of pension
provision for the individual.
14.55An insured person deferring his/her pension
from age 65 would expect a higher pension
because the pension would be payable for a
shorter period and there would have been a
“loss” of income over the deferred period. The
same factors should be applied to increases
for qualified adult allowances. The following
table sets out the possible rates which could
be applied if pension were deferred beyond age
65, with age 70 being the latest age to which
deferral could be made.
Table 14.1: Deferred Pension - Possible Rates (%)
Deferral
to age
Male
Female
Average
(unisex)
66
109.8
109.3
109.6
67
120.8
119.6
120.2
68
133.1
131.0
132.1
69
146.6
143.8
145.2
70
161.8
158.0
159.9
14.56Assuming that insured persons would retain
the right to take a pension at age 65/66, three
distinct situations where “deferral” could arise
are as follows:
l Where
the necessary contribution record is
not established by age 65/66;
l Where
deferral results in the insured
person qualifying for a higher rate of
pension by making additional contributions.
This would be very common if the qualifying
period was significantly extended;
l Where
the insured person simply wishes
to defer income. As the deferred pension
should be calculated on an actuarial basis
this would be cost neutral. There may be
Green Paper on Pensions
217
some slight selection on health grounds but
the financial impact should be small.
Retirement age and the Social
Welfare pension
14.57The previous discussion examined the
implications of allowing flexibility in relation
to the State retirement age, particularly
in relation to deferring the Social Welfare
pension. In broad terms, however, the
options regarding the retirement age for Social
Welfare pensions are as follows:
i)Leave the retirement age as it is, with
no incentives introduced to encourage
employees to remain in the labour force
post-retirement age;
ii) Remove barriers to working longer,
including the requirement whereby a
person reaching 65 years of age must first
retire for a period before being able to
work and retain a portion of their pensions,
possibly subject to a limited number of
exemptions for specific occupations;
iii)Incentivise those who wish to remain in
the labour force after retirement age.
Incentives could include a larger pension
(on an actuarial basis) if deferred over a
number of years and could also seek to
increase arrangements for workers to draw
down part of their pension, while working
part-time;
218
iv)Increase the retirement age incrementally:
a) over a number of years, in line with some
other countries;
b) in line with life expectancy for different
age cohorts.
v) Increase the retirement age for younger
people;
vi)Lower pension payout. While this is an
option that some countries are pursuing, it
would seem counter to Government policy
in relation to the goals of State Pension
which include poverty alleviation and a
minimum income guarantee.
Green Paper on Pensions
Social Welfare Pensions: Raising the Age for All
14.58The National Pensions Review (2006)
considered the question of an increase in the
State retirement age. The primary argument
in favour of increasing retirement age is
financial. A further argument in favour of
such an increase is on grounds of intergenerational equity, the principle whereby
each generation should enjoy the same
proportion of adult life spent contributing taxes
to support Social Welfare pensions and spent
receiving Social Welfare pensions.
14.59This principle arises in the context of
increasing life expectancy for people aged 65
years and over for whom, as a consequence,
the proportion of adult life spent in retirement
would increase and the proportion spent in
employment would fall unless the retirement
age were to be increased. Although the
financial argument is strong and the principle
of inter-generational equity is clear, there
are nevertheless some obstacles which
would have to be overcome and issues to be
examined further if the State retirement age
were to be increased.
14.60Among the possible obstacles is the view that
Social Welfare pensions are a contract between
contributors and the State which should not be
changed unilaterally. Another is that there could
be opposition on health grounds to people being
required to work longer. Finally, there could be
a knock-on effect on the benefits provided by
occupational pension schemes, in practice if
not in law, particularly in relation to integrated
defined benefit schemes.
14.61The fact that average life expectancy is lower
for those on lower incomes means that any
given increase in the retirement age would be
proportionately more unfavourable for the less
well-off. Most lower earners would be wholly
dependent on the first pillar pension, whereas
higher earners, who also have longer working
lives than lower earners, are more likely to
have other resources to allow them retirement
flexibility. Another issue is that, for savings to
ensue, those below the raised pension age
would have to continue to be gainfully employed,
not having recourse to other Social Welfare
benefits. Finally, competition for employment
would be increased for those not yet eligible
for the Social Welfare pension. This could have
some effect on unemployment and earnings.
Social Welfare Pensions: Raising the Age for
Younger People
14.62The Actuarial Review of the Social Insurance
Fund (SIF) presents a number of methods for
phasing in retirement age increases, which
attempt to track the improvement in life
expectancy that are expected for younger age
groups over time.
14.63The first method is an increase in the
retirement age of one year in every decade,
phased in from 2014-2015. Each one year
increase would be phased in over two years, to
smooth the transition between each increase.
The retirement age increases proposed under
this model are:
Table 14.2 – Retirement age increases by calendar
year
Calendar year
Up to 2013
2014-2015
2016-2023
2024-2025
2026-2033
2034-2035
2036-2043
2044-2045
2046-2053
2054-2055
2056+
Retirement age – option A
65
65 – 66
66
66 - 67
67
67- 68
68
68 – 69
69
69 – 70
70
14.64The second method proposed is based on the
year of birth of pensioners when they reach
retirement age. Two different approaches
were examined in the Review, with ‘Option C’
pushing back the effective year of introduction
by ten years compared to ‘Option B’, i.e. people
born in each decade can retire a year earlier
under ‘Option C’.
14.65 The Review includes an increase in labour
force participation at each increase in
retirement age and also includes additional
SIF expenditure in relation to unemployment,
illness and invalidity claims by people aged 6569 arising from the increase in retirement age.
14.66The savings from the increase in retirement
age are presented in terms of the reduction
in the projected deficit155 (benefits less
contributions) of the SIF over time. It is clear
that increasing the retirement age has the
potential to contain, to some degree, the extent
in the projected rise in benefit expenditure.
Under Options A and B, which are based on
almost identical retirement ages, the projected
shortfall falls to 5.3% of GNP in 2061 from
6.4% in the absence of any reforms. Savings
are phased in more slowly under Option C,
with a deficit of 5.5% of GNP projected in 2061.
155Benefits are indexed in line with earnings while
contribution rates are assumed to be as for the
current system.
Table 14.3 – Entry cohort methods of increasing the retirement age
Year of birth
Up to 1950
1951 to 1960
1961 to 1970
1971 to 1980
1981 to 1990
1991 to 2000
Retirement age – option B, phased from 2016
65
66
67
68
69
70
Retirement age – option C, phased from 2026
65
65
66
67
68
69
Table 14.4 – Approximate effect of gradually higher retirement age on projected deficit of the Social
Insurance Fund (% of GNP)
No change
Option A
Option B
Option C
50% pension
Option B1
2021
1.1
1.0
1.0
1.1
2.5
2.3
2031
2.7
2.3
2.3
2.5
4.8
4.2
2041
4.6
3.8
3.8
4.0
7.4
6.1
2051
6.3
5.1
5.1
5.4
9.9
7.9
2061
6.4
5.3
5.3
5.5
10.0
8.3
Green Paper on Pensions
219
14.67The Social Welfare reforms presented in
the UK pensions White Paper combined an
effective pension increase (restoration of
earnings indexation) with an increase in the
retirement age. The SIF Review includes
projections of a pensions increase to 50%
of GAIE, or c. €300 in 2007 terms. This adds
substantially to the proposed deficit in the SIF
over time, with an eventual increase of 3.6% (to
10% of GNP) by 2061. Combining the pension
increase with Option B limits the increase in
SIF expenditure somewhat, and results in a
final deficit level of 8.3% (‘Option B1’).
220
14.68It is common for any changes to the retirement
age to be announced clearly and introduced
gradually, so that a higher retirement age
applies only to those born more recently. A
balance will need to be achieved between
maintaining the stability of the Social Welfare
pension system, supporting the voluntary
nature of occupational pension provision and
intergenerational fairness.
14.69Increasing the retirement age for the Social
Welfare pension is one of the most efficient
ways to provide an appropriate basic retirement
pension, as it allows the State to target
resources towards those who need it most.
Retirement age and
occupational schemes
14.70In relation to occupational pension schemes,
it has been suggested that members of
occupational pensions should have the
option (but not the obligation) to remain in
employment beyond the retirement age of their
schemes and continue to accrue additional
pension entitlements. Some employees,
especially in manual occupations, would not
be physically able to work beyond the age
of 65. Were the mandatory retirement age
raised or removed, there might be employees
who wished to continue working but were
not capable of doing so, and assessment
procedures would have to be invoked by
employers.
14.71However, the purpose of this proposal is that
such employees could use the additional
Green Paper on Pensions
period of employment to accrue further
pension if their entitlements at normal
retirement would not be adequate. A further
development of this proposal is to allow
employees the option of part-time working
combined with partial drawdown of any
pension entitlements.
14.72While provisions for early retirement can exist,
the majority of occupational pension schemes
have a normal retirement age of 65, with a
relatively small proportion having a retirement
age of 60 to 64, and a very small number
allowing earlier retirement for specified
professions. Some of these schemes have
provision for late retirement, almost always
relying on the consent of the employer. The
increase in life expectancy has affected the
provision of supplementary pensions as set out
in the following paragraphs.
14.73For members of defined contribution schemes
or contributors to Personal Retirement
Savings Accounts and Retirement Annuity
Contracts, the effect of the increase in life
expectancy is to reduce their retirement
benefits because the amount they save will
purchase less pension. Interest rate changes
and the low returns on equities has meant that
it has not been easy to distinguish the effect
of improved life expectancy separately from
other factors. However, the changes in life
expectancy over the last 10 years would have
on their own caused a fall of approximately
10% in retirement incomes.
14.74The effect on defined benefit schemes has
been more complex. Again, it has been
obscured by investment losses and interest
rate falls of recent years. However, the
underlying result has been an increase in
benefit costs. This has been more than 10%
because not alone have actuarial valuations
reflected the increases seen to date, but they
also reflect the belief that mortality is likely to
continue to improve at a faster rate than was
previously expected.
14.75In many defined benefit schemes, the cost of
the improvement in mortality has been met
wholly by the employer. However, because
of this increasing cost, a number of these
schemes have been closed to new entrants,
who may have a defined contribution scheme
instead. At least part of the effect of the
mortality changes has therefore been borne
by employees with shorter service, whose
benefits at retirement in the replacement
scheme will be less valuable. In other defined
benefit schemes, members may also (in some
schemes with the members’ agreement) have
had their contribution rates increased, and
in some cases, benefits may also have been
reduced.
14.76The impact of mortality improvements will
be increased because people are joining the
workforce later. Thus, the cost of a longer
retirement has to be financed during a shorter
working life.
14.77The suggested change to allow optional
later retirement could be implemented by
prohibiting the imposition by employers of any
mandatory retirement age, or by prohibiting
any mandatory retirement age less than,
say, 68 or 70 except for a small number of
occupations. This would allow employees
more flexibility in meeting their retirement
savings needs, and would also have the
beneficial effect of allowing those who wish to
continue working to do so.
14.78In relation to the interaction of occupational
pension scheme provision and the taxation
system, some changes could be considered to
incentivise working later including:
l Adjusting
age-limits on pension
contribution tax reliefs;
l Increasing
the flexibility of the tax rules to
permit an older worker to draw a partial
occupational pension while continuing
to work for the same employer where
the scheme rules allow. (Currently, an
employee who reaches normal retirement
age and continues in service can either
elect to defer receipt of pension benefits or
choose to commence benefits - taking the
tax-free lump sum and/or the full pension
immediately – and continue working); and
l Review
the minimum age of 50 for early
retirement.
14.79Finally, in order to ensure adequate
replacement incomes for people in retirement,
at whatever age that may be, supplementary
pension coverage will need to increase further
and allow people easier access to more flexible
products through which they can prepare for
retirement.
Conclusion
14.80Enhancement to the Social Welfare system
can make some contribution to encouraging
longer working amongst older people and a
number of ways in which this can be done
have been outlined in this chapter. However,
it must be stressed that these measures
cannot, on their own, deal with the question
of increasing employment amongst older
people or provide sufficient incentive to people
to remain in employment after “normal”
retirement age. Generally speaking, workers
do not, in most cases, have any choice when it
comes to retirement. Most employments have
a compulsory retirement age at 65 and some
flexibility may need to be introduced here to
allow people to benefit from the measures
suggested. The attitudes of employers and,
indeed, employees will be crucial.
14.81In relation to overall policy objectives,
mobilising the labour supply of older people
will be an important strategy to cope with
the challenges Ireland faces as a result of
population ageing.
14.82Lower pensions, higher saving, higher public
expenditure or longer working lives are
the four key policy options available, with
sustainability, adequacy of retirement incomes
and increased coverage of private pensions the
priority goals.
14.83Compared to the past, people now tend to
start working life later because of longer
education, and tend to retire earlier and live
longer, healthier lives. For all these reasons,
pensions are more costly per person and
people contribute for fewer years per year of
retirement.
14.84In light of the above, retirement age needs to:
l Be
appropriate to make it possible to
provide an adequate pension;
Green Paper on Pensions
221
l Rise
in a rational way as life expectancy
increases;
l Enable
labour-market flexibility, allowing
people attractive choices to generate
income and to phase the move from fulltime work to full retirement. This could
involve:
l winding-down
– where people can work
part-time and take part of their pension;
l stepping
down –where they might take a
less demanding role that still uses their
skills, and;
l drawing
down – where someone retires
and takes their pension but later returns
to work and starts another pension.
222
14.85To further facilitate the employment of
older workers, a range of options may be
considered, as follows:
l Providing
for flexibility in the retirement
age;
l Creating
incentives for workers who want to
remain in the labour force after the age of
65;
l Facilitating
a gradual move to retirement
through changed working arrangements;
l Increasing
the contributions required for
full pensions and/or the qualification period
for benefits; and
l Tightening
the conditions for early
retirement.
14.85Given that Ireland is seen to be in a position of
strength relative to other developed economies
in terms of retirement age, properly designed,
imaginative incentives which allow a flexible
approach to employment in later years may
bring the results needed. Such an approach
could contribute to the reduction of costs of
pensions, reduce inactivity levels and, for the
individual, broaden ways to maintain a decent
standard of living into older age by accessing
good quality work.
Green Paper on Pensions
Work flexibility in older age: a new approach to retirement
With people living longer and fitter lives, the costs of pensions increasing, and younger workers seeking
to increase their current living standards, growing numbers of people want to work, or feel a need to
work, beyond the State pension age. Sustainability considerations may mean that the idea of increasing
retirement age should play a central role in our pensions strategy.
Government policy is to facilitate those who wish to extend their working lives. The average exit age
from the labour force in Ireland was 64.1 years in 2005, compared to the average EU25 age of 60.9
years. The current employment rate for older people (55-64) is over 53%. The OECD has commented,
however, that population ageing in Ireland could have a profound socio-economic impact if Ireland’s
potential labour supply is not mobilised more effectively.
There are a wide range of viewpoints held by both individuals and employers on an increase in
retirement age. While recent legislative change has improved the possibilities for people to work into
older age if they wish, there is a view that a change of mindset needs to be promoted among both
employees and employers to encourage older workers to remain in employment.
Flexibility in pension arrangements and working conditions may assist in removing some structural
barriers to working longer. In addition, more flexibility may be needed in the Social Welfare pension
system. Attention might also be given to the alignment of other policies to support any change in
retirement age, including continuing to create the conditions for economic growth and competitiveness,
narrowing health inequalities, and adapting HR processes and practices.
Allowing people to postpone retirement and to improve their Social Welfare benefits through further
employment would be in keeping with EU policy in this area.
While the primary argument in favour of increasing retirement age is financial, a further argument is on
the grounds of intergenerational equity. There are nevertheless some obstacles which would have to be
overcome and issues to be addressed if the State retirement age were to be increased.
The Actuarial Review of the Social Insurance Fund presents a number of methods for phasing in
retirement age increases. It is clear that increasing the retirement age has the potential to contain, to
some degree, the extent of the projected rise in benefit expenditure. A balance will need to be achieved
between maintaining the stability of the Social Welfare pension system, supporting the voluntary nature
of occupational pension provision and intergenerational fairness.
Given that Ireland is seen to be in a position of strength relative to other developed economies in
terms of retirement age, properly designed, imaginative incentives which allow a flexible approach to
employment in later life may bring the results needed.
Questions for consideration
1.Should measures be put in place to encourage
later retirement? Should measures be put in
place to encourage employers to retain older
workers? What form should such measures take?
2.Should a system allowing for voluntary deferral of
the Social Welfare pension be introduced? How
should this operate?
3.Should other incentives be introduced to encourage
people to work beyond normal retirement age?
4.In order to encourage later retirement, should
employers be prohibited from setting a retirement
age below a certain age? Should they be
prohibited from setting any retirement age?
5.In order to contain costs and reflect increased
life expectancy, should a change be made to the
retirement age for Social Welfare pensions? How
should such a change be implemented?
Green Paper on Pensions
223